Personal income tax on individuals working abroad

A draft law that would make numerous amendments to the Russian Tax Code has been submitted to the State Duma following revision. One key change affects personal income tax (PIT) on the compensation of individuals working abroad.

Under the draft law, the following payments would be treated as income sourced in Russia:

1) Compensation for remote work under an employment contract with a Russian company (except for work in a separate division of a Russian company abroad) or a separate division of a foreign company that is registered in Russia

2) Compensation for work and services performed via the Internet using domain names with the Russian national domain extension and/or information systems with hardware located in Russia and/or combinations of hardware and software located in Russia, provided that at least one of the following criteria is met:

• The individual taxpayer is a Russian tax resident
• Income is received on the individual taxpayer’s account in a bank located in Russia
• The sources of income are Russian companies, individual entrepreneurs, notaries in private practice, lawyers that have opened law offices and separate divisions of foreign companies in Russia

Currently, companies often do not withhold PIT on income from employment, work and services under civil contracts abroad, since such income does not come from a source in Russia. If an individual is a tax resident, income is to be declared in Russia, and additional PIT may be charged. The income of a non-resident individual is not taxable in Russia.

Thus, if the draft law is adopted, citizens working abroad under an employment contract or civil contract will, in some cases, be taxed in Russia. Such an approach may come into conflict with double tax treaties, under which employment income is often tax-exempt in a country where work is not performed.

The provisions on the taxation of payments under a remote work contract are to enter into force on 1 January 2024, and the provisions on the taxation of individuals performing civil contracts, on 1 January 2025.

Such income will be taxed at the 13% (15%) rate even for tax non-residents.